Centrica Unwinds Forwards, Enters Currency Swap

Centrica, a U.K. based energy supplier, has unwound some of its foreign exchange forward contracts on the Canadian dollar/sterling currency pair and entered a two-to-three-year currency swap to lock-in the current exchange rate.

  • 25 Apr 2004
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Centrica, a U.K. based energy supplier, has unwound some of its foreign exchange forward contracts on the Canadian dollar/sterling currency pair and entered a two-to-three-year currency swap to lock-in the current exchange rate. In the forwards, which are rolled approximately every six weeks, the company sold Canadian dollars at CAD2.25. Centrica was able to close these out at an exchange rate of CAD2.50. Although the value of the assets Centrica is hedging has dropped because of the fall in the value of the Canadian dollar, it has made a cash gain through this transaction.

"We came up with the idea when we saw how much we could lock in with a longer-term deal," said Tony Kendall, group treasurer in Windsor. Another advantage of the currency swap, he added, is that it reduces the cash flow volatility that resulted from the forwards' short maturities. Centrica also picks up the positive carry in the interest rate differential from the currency swap, explained Kendall, as it is receiving a U.K. rate of 4% and paying a Canadian rate of 2%. Kendall declined to name the counterparties on the swaps.

"We have swapped as much as we planned for now, but we would consider this again in the future," he said. Centrica matches U.S. dollar assets through its commercial paper program, so the group does not have cash flow volatility on these assets, noted Kendall.

  • 25 Apr 2004

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